Are you ready?

Research last year revealed that many water companies were prepared for competition. Utility Week and Tata Consultancy Services held an industry roundtable to see if things had changed.

With PR14 well underway, the water industry is ready to turn its attention to the upcoming reforms laid out in the Water Act, namely the opening of the market to competition for non-domestic customers in 2017. A major research project on this topic last year carried out on behalf of Utility Week and Tata Consultancy Services highlighted a worrying lack of water company preparation for competition, so Tata was back with Utility Week last month to host a roundtable discussion between water company and sector representatives to see if matters had improved.

Opening speakers included John Parsonage, interim programme director for Open Water, and Mark Powles, chief executive of Business Stream and as such a delegate who could claim real experience of a competitive water market. Parsonage outlined the preparations of the Open Water programme, while Powles gave a perspective both as an incumbent market player in Scotland and a prospective entrant to the English market.

According to Powles, incumbent water companies in England could find it difficult to defend their positions against new entrants. Business Stream, he said, had risen to the challenge and had even become an active new entrant south of the border (he said contract wins would be announced in the next few weeks).

It was felt that the current market was one “designed to fail”, with Powles observing that the current system allowed only large companies with a consumption of more than 50 megalitres a year to switch supplier, and it was a process that could take three months.

This, said Powles, could be put right when competition is introduced in three years’ time. “The Scottish pilot”, as it has jokingly been called, had been a success and delivered significant customer benefit.

He also argued that it was a “myth” that only large customers had benefited from competition, claiming Business Stream was “hitting in all directions” and targeting customers of all sizes.

Delegates were unanimously confident the market would open on time in 2017. This was in stark contrast to the findings of the research last year, when just 37 per cent thought the structure would be in place on time. This suggests that despite some setbacks, such as the departure of its chief executive Keith Fowler, the Open Water programme is moving ahead well. The next major landmark is a revised high-level design of the market framework, scheduled for June.

The original blueprint, which went out for consultation in January and laid out proposals on how competition would work in England, was described as a welcome milestone, “a stake in the ground”.

However, while responses were broadly positive, delegates said it lacked detail on some issues such as retail in trade effluent. Parsonage assured the industry that Open Water was looking into this, and had set up a working group built off the back of the Water UK trade effluent network.

There were also uncertainties about how retail exit would work without the requirement of water companies to separate their wholesale and retail businesses.

One of the overriding objectives of the market opening is to provide a level playing field for new entrants. Powles said problems could arise if new entrants were pushed aside by incumbent retailers being able to resolve problems faster by “using the back door”. He argued that in Scotland, licence conditions meant that Business Stream had to share vital data with new entrants and could not benefit from cheap cost of capital.

Delegates agreed that creating a level playing field was crucial because referrals to competition courts “would be a failure for the industry”.

Also on the agenda was board-level reluctance to grasp the competition agenda, and the difficulties facing smaller water-only companies. But Open Water is not sitting on its hands, having addressed a number of issues highlighted in the research and holding 25 separate meetings with water companies in the process.

The programme’s move to open up dialogue with the chief executives of all water companies also received firm approval around the table and was described as having previously been “a missing part of the jigsaw puzzle”. The series of workshops, which started at the end of March and will run until the middle of June, have been instrumental in dissipating board-level hesitation, agreed delegates. As PR14 moves into its next phase, the senior focus is moving to Open Water.

Open Water itself has had its first full board meeting and is set to start on phase two following the passing of the Water Act. The body also plans to increase transparency by publishing board minutes on its website.

Last autumn, research by Utility Week and Tata Consultancy Services revealed that just one-fifth (22 per cent) thought policy framework for business retail competition was robust. However, the general consensus around the table was that the programme was a suitable vehicle to facilitate market reform. Water companies are already setting aside funding for improved customer service, said one delegate, in anticipation of competition.

The late addition of an amendment to the Water Bill to allow retail exit was also widely praised after the government bowed to pressure from the industry in April. While delegates said it was too early to tell who would exit the market, they agreed that the amendment was welcome and indicated that some water companies were likely to bow out.

However, a sense that companies were sitting on the fence was also evident, with a number of delegates unwilling to commit to entering or exiting the market.

Parsonage said he was intrigued by this “wait and see” attitude from water companies, while Powles said his experience in Scotland had taught him that he could not afford the luxury of biding his time. Market research had indicated to him that 40 per cent of customers were likely to switch.

As one water industry delegate observed, companies are “keeping their powder dry in a number of barrels”. The signs were good on the day, but it remains to be seen whether every water company will willingly embrace competition.